UBS seeks to raise fees amid mutual fund conversion

Losing revenue from 12(b)-1 fees, the firm is asking its advisers to raise minimum fees to help make up for lost revenue

As UBS Wealth Management Americas begins moving many of its clients into cheaper classes of mutual funds, the firm is asking advisers to consider raising their annual fees for those clients.

UBS managers are informing many of the firm's approximately 7,100 advisers that some of their clients' fees will be raised by the suggested amount of around 20 to 25 basis points unless the adviser individually opts the client out, sources said. The firm is also increasing the amount advisers have to charge for non-discretionary managed account programs in order to avoid penalties, according to internal documents reviewed by InvestmentNews.

The move comes as the firm faces a potential loss in revenue from moving clients out of Class A and Class C mutual fund shares into institutional and advisory share classes. The firm is making the conversion this summer in order to compete with its wirehouse rivals and other firms who already offer the products, which are cheaper for clients because they do not charge annual 12b-1 fees.

Those fees, known as marketing or service charges, range between 0.25% and 0.75% of assets under management depending on the share class, according to filings with the Securities and Exchange Commission. Brokers are legally allowed to accept 12b-1 fees on some fee-based accounts, although it is sometimes considered “double dipping,” or less transparent.

“Even though they're trying not to say it that way, it's because of the 12b-1 fees that they're doing it,” said one UBS adviser who asked not to be identified because he did not have permission from his firm to speak publicly on the matter. “They're not telling us to raise fees, but it kind of feels like they want us to.”

The fee increases are not mandatory, and advisers have the opportunity to decline or lower fees starting August 2. Clients would be notified of any changes, which would go into effect later in the year.

While advisers do not have to raise fees, the discount sharing floor, the lowest amount an adviser can charge without being penalized, is increasing by the same amount as the lost 12b-1 fee in accounts under $1 million. For the firm's proprietary wrap fee program in PACE Multi accounts, for example, the discount sharing floor is going from 1.00% to 1.25% for accounts up to $250,000 and from 0.75% to 1.00% for accounts up to $1 million.

Advisers who still want to charge 0.75% for those accounts must take a 25 percentage point hit to their grid level, so that adviser would take home only 15% of the revenue compared to a typical 40% share.

“The discount sharing is probably what has caused advisers to do the most grumbling,” the same UBS adviser said.

A UBS spokesman, Gregg Rosenberg, said in an e-mailed statement that the firm has been “transparent” with advisers and clients about the transition.

“Advisers are being given the opportunity to review accounts impacted by the conversion and decide if a fee change is warranted and reasonable for that account,” Mr. Rosenberg said.

The move will not affect accounts already in a discretionary relationship, in which the adviser acts as a fiduciary and must only invest in what is in the client's “best interest.” UBS already rebates 12b-1 fees for those accounts, and those accounts are not subject to the opt-out-style fee increase.

UBS is the last of the four major wirehouses, including Morgan Stanley Wealth Management, Bank of America Merrill Lynch and Wells Fargo Advisors, to start offering institutional or advisory shares to retail investors.

The same UBS adviser said he was not even aware that he was receiving the fees because his previous firm had rebated 12b-1 fees and he assumed it was industry standard.

The increase of 0.25% at UBS would likely not push any of the advisers well outside of industry averages. Most advisers at the firm's large competitors charge somewhere between 1% and 2%, depending on services provided.

Mr. Rosenberg declined to provide an estimate for how much annual revenue the 12b-1 fees accounted for, but it could be $100 million or more.

Getting advisers to do more fee-based business and financial planning has been a big push by UBS, and fee-based assets comprise approximately $320 billion of the approximately $1.04 trillion in total assets under management at the end of the first quarter.

The conversion will impact many of the firm's managed account programs that are managed on a non-discretionary basis, including the popular PACE Multi programs, the PMP rep-as-portfolio manager platform, Strategic Wealth Portfolio and others, sources said.

The firm told advisers once before in the spring that they should consider raising fees. At that point, it was up to the adviser to opt in, rather than opt out, according to sources.

Clients will not be charged any transaction costs and the conversion will be tax free, according to UBS' filings with the Securities and Exchange Commission. Clients may still have to pay investment management or operating fees to the fund company in addition to the fee the adviser charges on the account.

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